This morning's melt-up from the cash open was extremely technical, lifting the US majors above various key technical levels.
However, that surge of buying did not last long and now that Omicron has struck in a second place in the US, the S&P (back below its 50DMA), Nasdaq (back below its 50DMA), and Dow (back at 200DMA) are all fading fast...
So what really changed?
Nomura's Charlie McElligott explains:
It’s pretty obvious: the Fed has green-lighted an accelerated taper in order to pull-forward a dense-but-short “lift-off,” as Jerome Powell is clearly now much more concerned about inflation (which is no longer transitory) than about economic growth
And Nomura's "Economic Quadrant" playbook highlights the fact that the current Equities risk-premium / thematic return profile very closely mirrors what they said it would do upon this the phase shift from “Expansion” into “Slowdown” being confirmed in the first week of October (and holding since)...
Extending this idea of “accelerated tightening” from the Fed, Nomura warns that this could drive this artificial economic cycle to experience an accelerated move into the NEXT potential quadrant shift, from “Slowdown” into “Contraction”.
And what would that mean for Factor fwd returns on both a static- and “transition into-“ cut?
McElligott's backtests show that during the initial phase-shift “transition” that the market actually begins to anticipate the hard economic “stop”…and with that will come policy-makers turning their efforts to “easing” - so you see “economic growth / inflation -sensitives” being to perform like “10Yr Yield Factor,” “WTI Crude Factor,” “Growth Nowcast Factor” and “Cyclical Value Factor” lead 3m out as traders sniff policy rate “cuts”
Top Performing Factors, 3m Fwd Return Based on if Current Quadrant just Transitioned into: Contraction
However, the Nomura MD warns that upon immersion with the “Contraction” phase, it is clear that there is a very rational “risk-off” phase, with leadership from “Low Risk” and “Quality”…but also one that rhymes with the “now” dynamic, as “Value” (Cyclical and Defensive) outperforms “Growth”:
Top Performing Factors, 3m Fwd Return Based on if Current Quadrant in: Contraction
Which is exactly what the yield curve appears to be screaming...a Fed policy error sparking a recessionary environment (and The Fed still cornered from acting by multi-decade-high inflation)...
Additionally, the Nomura strategist note that the environment remains shockingly dysfunctional, with my colleague John Pierce noting that with VVIX (‘vol of vol’) closing at 155 yday, it was the second-highest closing level YTD--which notably was only previously exceeded in 2021 by the massive pain felt during the Meme stock / HF Short Book blow-up in January.
Finally, and VERY notably, McElligott warns that the CTA Trend model is nearing a “flip” trigger level in the legacy “+100% Long” signal in S&P futures to “Short” - we would need to CLOSE below today’s trigger of 4496, but it already feels like discretionary traders are trying to press it there now - selling under 4496 would see the “long” sold and flip “-42% Short” across the aggregate signal (I would again note that it has already “held” upon earlier test this morning as a tradeable bounce level)